You are a financial adviser meeting with a long-time client, “Bob.” Bob is in his late 70’s, retired, and a widower who lives alone. Though he has a good relationship with his adult children, they live far away. Bob is not exorbitantly wealthy, but he planned well for retirement. He lives comfortably and plans to leave some money for his children when he is gone. Though you know Bob to be a very intelligent man, you have noticed in recent meetings that his memory is slipping, and that his ability to digest financial information is not what it used to be. In today’s meeting, Bob is accompanied by “John,” who Bob calls his nephew. Bob hasn’t spoken of John before, and you have never met him, but John is keenly aware of Bob’s financial affairs. Bob and John—mostly John—are asking for your help to liquidate some of Bob’s investments without giving you a clear reason why. When you begin to ask questions, John cuts you off and insists you respect Bob’s wishes and honor his instructions. Bob nods in agreement. What do you do?
This type scenario, unfortunately, plays out far too often. Bob exemplifies a growing number of senior citizens and vulnerable adults who are targeted by bad actors for financial exploitation and fraud. Sadly, many such bad actors are family members or close acquaintances of their victims. In 2017, AARP conducted a survey of 1,028 people from the “general investor population,” including 214 individuals who had been victims of financial fraud. Over half of those identified as victims were over the age of 70, nearly 80% of victims lived alone or with a spouse only, and 54% of victims were retired and not looking for work.
The AARP study also notes a recent uptick in regulatory complaints, investigations, and enforcement actions related to financial exploitation and fraud, many of which involve senior victims. For example:
The Federal Trade Commission’s Consumer Sentinel Program, a central repository for fraud complaints in the U.S., reports that complaint volume has increased by 60% in the past five years
The U.S. Securities and Exchange Commission (SEC) has increased the number of investment fraud prosecutions by approximately 15% per year since 2014
The Commodity Future Trading Commission (CFTC) has reported a huge increase in the number of enforcement actions it has taken, imposing $3.14 billion in civil monetary penalties in 2014 alone
However, these regulatory efforts are often too little too late. As a former regulator, I can say from experience that it is very difficult to make whole a victim of financial fraud or exploitation after a fraudulent transaction has occurred. Many fraudulent transfers are made to overseas accounts, or to bad actors who quickly spend their ill-gotten gains. Even when the fraudsters are caught, they rarely have the ability to give back what they took.
The best way to combat this problem is to prevent financial fraud and exploitation from occurring in the first place. Key players in applying this preventative medicine are the trusted financial advisers that work closely with clients to understand their financial condition, and the goals and anxieties they have regarding their finances. These advisers are far more likely than regulators to learn of potential financial fraud or exploitation before it occurs. However, fiduciary duties, privacy restrictions, and loyalty to clients often makes it difficult for such advisers to refuse a client’s instructions, even when the adviser suspects fraud may be occurring.
A bill introduced in the Minnesota Legislature this year could help address this problem. SF 919, authored by Senators Karin Housley (R – District 39) and John Hoffman (DFL – District 36), will be heard by the Senate Committee on Aging and Long-Term Care Policy later today. In summary, the bill would provide immunity from civil and administrative liability for covered investment advisers and broker dealer agents that do the following with respect to an “Eligible Adult” (an adult over 65 or that is deemed vulnerable under Minnesota’s adult protective services statutes):
Make an optional report to Adult Protective Services and the Minnesota Department of Commerce that the adviser reasonably believes that financial exploitation of a senior or vulnerable adult may have occurred, been attempted, or is being attempted;
Contact a trusted third party previously designated by the client to inform that third party of potential abuse/exploitation;
Delay disbursing funds from a client’s account for up to 15 business days if the adviser reasonably believes that abuse/exploitation would result from the disbursement.
Passing this bill would be a positive step forward for Minnesota’s consumers, financial services professionals impacted by the bill, and for regulators that can act on reports to stop fraudsters before it’s too late. The full text of SF 919, as introduced, is copied below.
A bill for an act
relating to commerce; providing financial exploitation protections for older adults
and vulnerable adults; proposing coding for new law as Minnesota Statutes, chapter
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:
Section 1. [45A.01] DEFINITIONS.
Subdivision 1. Scope and application. For purposes of this chapter and unless the
context otherwise requires, the terms in this section have the meanings given them.
Subd. 2. Agencies. "Agencies" means the common entry point and the commissioner
of commerce collectively.
Subd. 3. Agent. "Agent" has the meaning given in section 80A.41.
Subd. 4. Broker-dealer. "Broker-dealer" has the meaning given in section 80A.41.
Subd. 5. Common entry point. "Common entry point" has the meaning given in section
626.5572, subdivision 5.
Subd. 6. Eligible adult. "Eligible adult" means:
(1) a person 65 years of age or older; or
(2) a person subject to section 626.5572, subdivision 21.
Subd. 7. Financial exploitation. "Financial exploitation" means:
(1) the wrongful or unauthorized taking, withholding, appropriation, or use of money,
assets, or property of an eligible adult; or
(2) an act or omission taken by a person, including through the use of a power of attorney, guardianship, or conservatorship of an eligible adult, to:
(i) obtain control, through deception, intimidation, or undue influence, over the eligible adult's money, assets, or property to deprive the eligible adult of the ownership, use, benefit, or possession of the eligible adult's money, assets, or property; or
(ii) convert money, assets, or property of the eligible adult to deprive the eligible adult of the ownership, use, benefit, or possession of the eligible adult's money, assets, or property.
Subd. 8. Investment adviser. "Investment adviser" has the meaning given in section
Subd. 9. Investment adviser representative. "Investment adviser representative" has
the meaning given in section 80A.41.
Subd. 10. Lead investigative agency. "Lead investigative agency" has the meaning
given in section 626.5572, subdivision 13.
Subd. 11. Qualified individual. "Qualified individual" means an agent, investment
adviser representative, or person who serves in a supervisory, compliance, or legal capacity
for a broker-dealer or investment adviser.
Sec. 2. [45A.02] GOVERNMENTAL DISCLOSURES.
If a qualified individual reasonably believes that financial exploitation of an eligible
adult may have occurred, may have been attempted, or is being attempted, the qualified
individual shall immediately notify the agencies.
Sec. 3. [45A.03] IMMUNITY FOR GOVERNMENTAL DISCLOSURES.
A qualified individual who, in good faith and exercising reasonable care, makes a
disclosure of information pursuant to section 45A.02 or testifies about alleged financial
exploitation of an eligible adult in a judicial or administrative proceeding is immune from
administrative or civil liability that might otherwise arise from the disclosure or testimony
or for failure to notify the customer of the disclosure or testimony.
Sec. 4. [45A.04] THIRD-PARTY DISCLOSURES.
If a qualified individual reasonably believes that financial exploitation of an eligible
adult may have occurred, may have been attempted, or is being attempted, a qualified
individual may notify a third party previously designated by the eligible adult. Disclosure
may not be made to a designated third party that is suspected of financial exploitation or
other abuse of the eligible adult.
Sec. 5. [45A.05] IMMUNITY FOR THIRD-PARTY DISCLOSURES.
A qualified individual who, in good faith and exercising reasonable care, complies with
section 45A.04 is immune from administrative or civil liability that might otherwise arise
from the disclosure.
Sec. 6. [45A.06] DELAYING DISBURSEMENTS.
(a) A broker-dealer or investment adviser may delay a disbursement from an account
of an eligible adult or an account on which an eligible adult is a beneficiary if:
(1) the commissioner of commerce, the lead investigative agency, law enforcement, or
the prosecuting attorney's office provides information to the broker-dealer or investment
adviser demonstrating that it is reasonable to believe that financial exploitation of an eligible
adult may have occurred, may have been attempted, or is being attempted; or
(2) the broker-dealer, investment adviser, or qualified individual reasonably believes,
after initiating an internal review of the requested disbursement and the suspected financial
exploitation, that the requested disbursement may result in financial exploitation of an
eligible adult; and
(3) the broker-dealer or investment adviser:
(i) immediately, but in no event more than two business days after the requested
disbursement, provides written notification of the delay and the reason for the delay to all
parties authorized to transact business on the account, unless the party is reasonably believed
to have engaged in suspected or attempted financial exploitation of the eligible adult;
(ii) immediately, but in no event more than two business days after the requested
disbursement, notifies the agencies; and
(iii) continues its internal review of the suspected or attempted financial exploitation of the eligible adult, as necessary, and reports the investigation's results to the agencies within seven business days after the requested disbursement.
(b) A delay of a disbursement as authorized by this section expires upon the sooner of:
(1) a determination by the broker-dealer or investment adviser that the disbursement
will not result in financial exploitation of the eligible adult; or
(2) 15 business days after the date on which the broker-dealer or investment adviser first
delayed disbursement of the funds, unless either of the agencies requests that the broker-dealer or investment adviser extend the delay, in which case the delay expires no more than 25 business days after the date on which the broker-dealer or investment adviser first delayed disbursement of the funds unless sooner terminated by either of the agencies or an order of a court of competent jurisdiction.
(c) A court of competent jurisdiction may enter an order extending the delay of the
disbursement of funds or may order other protective relief based on the petition of the commissioner of commerce, lead investigative agency, broker-dealer or investment adviser
that initiated the delay under this section, or other interested party.
Sec. 7. [45A.07] IMMUNITY FOR DELAYING DISBURSEMENTS.
A broker-dealer or investment adviser that, in good faith and exercising reasonable care,
complies with section 45A.06 is immune from administrative or civil liability that might
otherwise arise from the delay in a disbursement in accordance with this section.
Sec. 8. [45A.08] RECORDS.
A broker-dealer or investment adviser shall provide access to or copies of records that
are relevant to the suspected or attempted financial exploitation of an eligible adult to
agencies charged with administering state adult protective services laws and to law
enforcement, either as part of a referral to the agency or to law enforcement, or upon request
of the agency or law enforcement pursuant to an investigation. The records may include
historical records as well as records relating to the most recent transaction or transactions
that may comprise financial exploitation of an eligible adult. Records made available to
agencies under this section are classified as private data on individuals or nonpublic data
as those terms are defined in section 13.02, unless the records are part of an active civil
investigation and classified as confidential or protected nonpublic under section 13.39.
Nothing in this provision limits or otherwise impedes the authority of the commissioner of
commerce to access or examine the books and records of broker-dealers or investment
advisers as otherwise provided by law.
Brian Edstrom is a Shareholder and Attorney at Avisen
Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having
spent several years working for federal and state regulators in Washington D.C.
and Saint Paul, MN before entering private practice. Brian assists
clients in all aspects of working with securities regulators, whether it be to
obtain a license or registration, prepare for an audit, or respond to an
enforcement investigation. Brian also regularly advises clients on their
general business needs, particularly surrounding raising money through